Set for recovery: Russia's tower crane market

In the period 2013 to 2016, the Russian tower crane market collapsed together with the construction industry. Business dropped by 40 to 50 per cent (%). The situation with the devaluation of the Russian ruble was worsened by some strange government bills, for example, introducing high taxes for new and used cranes. Change is in sight, however, as Russia’s economy and construction industry shows signs of revival. There is a widespread feeling that sales should start growing again this year.

According to data from the Russian State Statistical Service, the country’s tower crane production reached a peak in 2013, when a total of 220 cranes were built in the country. Back in the days of the Soviet Union, local manufacturers supplied construction and lifting industries with nearly 4,000 cranes a year, meeting all domestic demand.

Modern Russia has rate of self-sufficiency in construction equipment of about 12 %, including 15 % for cranes. Of a dozen crane factories operating in the time of communism, only three large manufacturers are left, namely Nyazepetrovsk Crane Plant in Chelyabinsk Oblast, Rzhevskiy Crane Plant in Tver Oblast, and Strommashina Company in Ivanovo Oblast.

Roman Mahaykov, Strommashina Company commercial director, says that Russian manufacturers produce an entire range of cranes for all types of construction works. He also notes that the quality of domestic products is quite acceptable, with a factor of safety close to 30 %. The average lifetime of a crane, according to their passports, is 16 years. New units are only being manufactured to order, however, as demand is still weak at the moment, Mahaykov says.

Holding the same opinion is Roman Radivilov, Rzhevskiy Crane Plant deputy general director, who says that imported cranes currently take 75 to 80 % of the Russian market. In 2016 his plant produced nearly 100 cranes, four times the output compared to 2012. Just like the Strommashina plant, however, cranes are only being built when an order has been received.

Radivilov says, “Products costing at least RUB 10 million (US$ 154,000), where the cost of components and raw materials is RUB 6 million (US$ 92,000) are impossible to produce for stock. Production at our plant is very similar to that of imported cranes since we are using more foreign, than domestic components. Of Russian origin is only the steel, hardware and cables, in other words, the structural steel metalwork. Electrical, drives and other equipment is 80 % imported.”

Commenting on the market situation, Radivilov suggests that between 2011 and 2013 the market was growing by nearly 20% a year but it collapsed with the fall in the exchange rate of the Russian ruble. Market players believe that this gives them good opportunities for development. The result is that imported equipment is now nearly 50 % more expensive to buy than Russian cranes. According to Radivilov, Russian-made cranes, with comparable quality to new machines, now cost the same as used foreign cranes which are five to seven years old.

While some manufacturers are thinking about an increase in their market share, Nyazepetrovsk Crane Plant is fighting for survival. According to official information from the press service, at the moment the plant is producing only eight cranes a year. A few years ago this figure was about 23 or 24 units. Serious challenges are faced because the company recently lost its largest contract, for the supply of cranes to Rostov-On-Don for the construction of the Rostov Arena, a 45,000-seat football stadium for games of the 2018 FIFA World Cup.

According to Vladimir Burmatov, a member of the State Duma, the lower chamber of Russian Parliament, who has supported this facility for a couple of years, the issue of the Nyazepetrovsk plant should be resolved at the political level. In September 2016 Burmatov appealed to the country’s government with a request to force contractors performing construction works in Rostov-On-Don to use cranes built at the Nyazepetrovsk plant. It is an issue that has been taken under the personal control of Igor Holmanskih, presidential envoy in the Ural Federal District, who promised to deal with the situation.

Fighting imports

The problem, however, is that contractors have already purchased their cranes. Instead of domestic brands, they have 16 Chinese cranes. They say that they have no money to fulfil these obligations, under the contract with the Nyazepetrovsk plant. In general, construction companies say that they received some cranes from the plant but, due to technical issues and the price, they changed to imported models. Breach of contract has been allowed within the agreements between the plant and contractors.

Over the last few years Russia has been impacted by a so-called import-replacement strategy, which started with the food market and quickly spread to a large number of segments, including machinery-building.

It usually takes place in the form of various government or Parliamentary bills, which introduce obstacles to the importation of various goods with the aim of freeing some space in the market for domestic companies. Several attempts in this direction have also taken place in the crane market.

In November 2015, member of the State Duma, Anatoly Aksakov, and the State Duma Committee on Waste, proposed a bill to encourage the use of domestically produced cranes instead of imported ones.

The idea was to introduce a new tax for imported construction equipment, including cranes, so that it would become uncompetitive on price with Russian machines. When the bill passed its parliamentary reading during the first few months of 2016, it had been amended several times so, in the end, a utilisation fee spread to new equipment, both imported and domestic.

At the moment, the rate of this utilisation fee is set at RUB 150,000 (US$ 2,310), multiplied by a factor depending on the age, weight and even the power of the machine, although these parameters do not affect directly or indirectly the cost of utilisation.

As a result, after the introduction of this new fee in February 2016 the cost of a new foreign heavy crane in its most basic configuration rose from RUB 55 million (US$ 847,000) by nearly RUB 4.5 million (US$ 69,000). At the same time the price for a three year old used model rose from RUB 25 million (US$ 385,000) to RUB 60 million (US$ 924,000). This measure has been criticised by all players in the market.

“It is a kind of nonsense that this bill was to support us but the cost of our equipment rose 15 to 30 %, so it is not contributing to increasing sales and, amid this harsh economic situation, our customers obviously are not happy with these changes,” commented a representative of a Russian crane manufacturer who wished to remain anonymous.

Andrey Komov, a spokesperson for the Association of European Business (AEB) in Russia, also argues that the steel content of modern equipment is more than 90 %, so scrap allows recuperation of significant cost. In addition, AEB believes new legislation seriously hit the foreign crane manufacturers in the Russian market, as the price of their production rose even more than for Russian products.

Oleg Chromchenko, general director at Rosan, a leading Russian importer of special equipment, including cranes, says that due to the fall in the exchange rate of the Russian ruble and the introduction of the utilisation fee or levy, the price for equipment rose between 30 and 40 % in 2016. According to Chromchenko, in 2015 alone his company faced a 50 % fall in sales. He suggests the new price rise might result in bankruptcies of some companies engaged in the import and distribution of construction and specialized equipment in the Russian market.

A similar opinion is expressed by Sergei Koinov, general director at ABM-Trade, another importer of special equipment, who says that the levy is killing business, as it contributing to the further fall in sales. For Russian manufacturers of cranes, introduction of the levy caused sudden problems. In response a similar measure has been introduced in Belarus, where Russian products are now subjected to a similar fee.

At the end of 2016, however, some first signs of improvement were seen in the market. First, the Russian ruble’s exchange rate rose, increasing in value by nearly 20 % against hard currency and there is a quite positive outlook for 2017 and 2018. It significantly reduces the price of imported equipment for Russian companies. Second, the Industry Ministry has agreed to revise the levy on some types of equipment, starting with trailers. It is expected that this trend will soon also reach the crane segment.

Revival has no alternative

According to a study by Global Research Consulting (GRC), the average rate of deterioration of construction equipment in Russia now stands at 50 %. Over the last few years, due to the harsh economic situation in the country, most investment programmes for equipment modernisation in the industry have been on hold, analysts say, but soon companies will have no chance, but to purchase new cranes.

In 2018, however, the situation should change with the rise in demand for new cranes as a result of the rapid increase in the number of investment projects in road, commercial and residential building. “Equipment would be purchased even with an increased price, as the price increase will simply be included in the cost of the apartments, roads and bridges,” the study says.

This statement is supported by a forecast from Mikhail Men, Russian Minister of Housing and Building, who suggested that the Russian building industry in 2016 would most likely fall compared to 2015. Starting in the first quarter of 2017, however, performance indicators will start rising again and, as soon as 2018 or 2019, might reach the pre-crisis level, Men says. For residential buildings this is about 85 million square metres a year.

At the same time, according to Men, for the construction industry the current crisis is only a temporary problem because, in general, the potential for the construction industry is underestimated. In his forecast, within the coming decade, the construction industry may reach its target indicators of 140 million square metres of residential building construction a year, which will spur demand for all types of construction equipment, including cranes.

The construction industry in Russia is closely linked to the general situation in the economy and, according to recent forecasts of the Economy Development Ministry, the country’s GDP was likely to start growing again at the end of 2016, after almost three years of fall. Most likely, this growth will only get stronger in 2017, the forecast adds.

Timur Allahyarov at the Russian Union of Industrialists and Entrepreneurs says that the crane segment has really been depressed over the last couple of years, as have a lot of machinery building segments in Russia. “However, we believe that the segment managed to adapt to the new market situation and sales will be growing again in the period 2017 to 2019 with sufficient compound annual growth rate, obviously because of a low base effect but, also, due to the launch of a new investment cycle in equipment modernisation by a large number of construction companies.”

Also, at the beginning of 2017, the Russian Central Bank started to reduce the refinancing rate. To fight against devaluation processes at the beginning of the current crisis, the Russian regulator had to raise it from 5.5 % in 2013 to almost 17 % in the end of 2014. As a result, Russian industry for the last couple of years has not seen any cheap loans, while banks in general refuse to grant loans to construction companies to purchase equipment.

In 2017, however, the refinancing rate should first be lowered below 10 % so, according to most forecasts, the industrial sector in Russia will finally get a new lease of life, as cheap money will be available again. Market players, however, so far remain very careful with forecasts, saying that the recent crisis made them hope for the best, but expect the worst.